More on the China Property Bust

As demonstrated in the chart below, April home prices in Beijing rose by a staggering 95% year-over-year vs. a nationally reported figure of 12.8% (though dividing total sales value of homes—384.6 billion yuan ($56.3 billion) in April—and the floorspace sold (72.4m square metres) yields growth of nearly 18%).

While there is little doubt that home prices are set to decline in China, low levels of personal and government debt should help lessen the damage from a property bust. As highlighted by the Economist (“China’s Economic Boom Can Survive a Property Bust”), the ratio of mortgage debt to GDP is only 15.3% in China, compared with a peak of 79% in America. The article highlights the example of Hong Kong’s late 1990s property bust to demonstrate that huge equity cushions should mitigate substantial damage to China’s banking system (unlike in the US and Europe). More specifically, in Hong Kong, where regulators bar mortgages of more than 70% of a home’s value, prices fell by almost half in the three years after the Asian financial crisis, yet mortgage delinquencies peaked at 1.4%. Finally, while mortgage books have grown by more than 70% for certain Chinese lenders, mortgages represent less than 20% of loans for most big banks, and loans to property developers account for perhaps another 8%. As such, banks have substantial capacity to absorb losses in the property sector, even if prices decline on the order of 25-30% (which is a distinct possibility given the massive run up we have seen).

While local government debt represents another distinct threat to the overall economy, particularly since they are heavily reliant on the property sales to fund their budgets, the article suggests these concerns may be somewhat overblown. According to Vincent Chan of Credit Suisse, land sales and property taxes should account for less than 17% of their revenues this year. Further, even if one uses an aggressive estimate of the debt carried by these local entities (11.4 trillion yuan as per calculations done by Victor Shih of Northwestern University), total public debt to GDP would be a manageable 50% of GDP, hardly alarming for an economy growing at over 10% in nominal terms and possessing $2.5 trillion of foreign currency reserves.